An Example

The government is deciding on number of street lights to be installed.

Three beneficiaries - A, B, C.

Four alternatives: n = 0, 1, 2, 3 where n is the number of street lights.

The governments objective to install the socially efficient number of

street lights.

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Total benefits and costs

As social net benefit is maximum at 2, that is the socially efficient

number.
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Net benefits with equal cost share

If n = 1, the total cost is 120. Hence, cost share for each is 40. The
private net benefit for A is then 60 40 = 20. Similarly for B and C
and n = 2, 3.
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Groves Clarke Taxes

Person A

Person A is not pivotal. Without him, the net benefit is maximum at

n = 2. With him the net benefit is maximum at n = 2. So his tax is
zero.

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Person B

Person B however is pivotal. With him the net benefit is maximum at

n = 2. Without him the net benefit is maximum at n = 3.
Bs tax is therefore the difference between the sum of net benefits of
others at n = 3 and the sum of net benefits of others at n = 2, i.e.
135 130 = 5.
B is paying the tax bacause his report changes the decision from
n = 3 to n = 2.
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Person C

Person C is pivotal as well. With him the net benefit is maximum at

n = 2. Without him the net benefit is maximum at n = 1
Cs tax is therefore the sum of others benefits at n = 1 and the sum
of others benefits at n = 2, i.e. 60 50 = 10.

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Net benefits with taxes

Post tax net benefit from this scheme: 10 for A, 40 5 = 35 for B,

120 10 = 110 for C .

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Incentives for truthful revelation

Notice that As net benefit is maximum at n = 3. Does he have an

incentive to lie and change the decision to n = 3?
Suppose A states his net benefit from n = 3 to be 70 instead of 35.
Then, sum of stated net benefits is maximum at n = 3.

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Incentives for truthful revelation

But then A becomes pivotal. Without him the sum of net benefits is
maximum at n = 2. His report changes the decision from n = 2 to
n = 3.
So he has to pay a tax and his tax will be equal to 160 120 = 40.

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Incentives for truthful revelation

As net benefit from lying will be

(Net benefit from n = 3) Tax

= 35 40
= 5

As net benefit from truthfully reporting is 10.

Hence A doesnt have incentive to lie.

You can repeat the same exercise for B and C to verify that they do
not have incentive to lie either.

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